What are coupon and yield?
The coupon rate is the yearly interest paid on the face value. A 10% coupon on a Tk 1 lakh bond means Tk 10,000 of interest a year, whoever holds the bond and whatever they paid for it. On a fixed-coupon bond this amount stays the same even when market rates go up or down.
The yield asks: what return am I getting on the money I actually paid? Bonds do not always trade at face value. Buy below face value and the same Tk 10,000 of interest is larger relative to what you paid, so the yield is above the coupon. Buy above face value and the reverse happens.
Say a shop brings in Tk 10,000 a month in rent, fixed by contract. Shafiq buys the shop for Tk 10 lakh, and his friend buys an identical shop next door for Tk 8 lakh. Both get the same rent (the “coupon”), but relative to what the friend paid, that rent is bigger, so his return, or “yield”, is higher. The numbers are only an example.
Why it matters to an investor
- To compare bonds: yield to maturity is the common yardstick for setting bonds with different coupons, prices and maturities side by side.
- To read the news: “treasury bond yields have risen” means the government is paying more on new borrowing, and older bonds have fallen in price.
- To avoid the high-coupon trap: a high coupon on a bond bought well above face value still gives a return below that coupon.
- To compare with other savings: it is the bond’s yield, not its coupon, that should be set against FDR or sanchayapatra rates.
Three rates, three questions
- Coupon rate: how much interest a year on the face value? It is set on the day the bond is issued and, on a fixed-coupon bond, never changes.
- Current yield: the year’s coupon as a percentage of today’s market price. Easy to work out: annual coupon ÷ market price. But it ignores the gain or loss from getting face value back at maturity.
- Yield to maturity (YTM): the total yearly return if you buy at today’s price and hold to maturity. It counts all the coupons and the difference between the price paid and face value. It assumes the issuer pays everything as promised.
Premium and discount
When a bond’s price is above face value it is said to trade at a premium; below face value, at a discount. Usually a bond trades at a premium when market rates are below its coupon, because buyers are willing to pay extra for that higher coupon.
An easy way to remember the rule: price and yield move in opposite directions. Buy at a discount and the yield is above the coupon, because you get back more than you paid at maturity. Buy at a premium and the yield is below the coupon, because you get back less than you paid.
Yields in the Bangladeshi news
Bangladesh Bank auctions treasury bills and bonds on behalf of the government. The “cut-off yield” in the news is the highest yield at which the government accepted money in that auction. It changes a lot over time: in one April 2021 auction, the 15-year bond yielded 5.87% and the 20-year 6.64%; in March 2025, the 10-year yield rose from 10.32% to 12.05%.
Think of someone who bought a long-term bond with a coupon of about 6% in 2021. In 2025, with new bonds paying close to 12%, selling their bond would have meant cutting the price a lot, so that a new buyer’s yield matched the market. The coupon stayed the same; the yield moved with the market.
Worked example
- Say a bond with a face value of Tk 1,00,000, a 10% coupon (Tk 10,000, paid once a year), and 2 years left. You buy it on the market for Tk 96,000.
- Current yield = Tk 10,000 ÷ Tk 96,000 ≈ 10.4%. A little above the coupon, because you paid less than face value.
- At maturity you get Tk 1,00,000, which is Tk 4,000 more than you paid. Counting two years of coupons plus that Tk 4,000, the yield to maturity comes to about 12.4% a year.
Result: the coupon is 10%, but bought at this price and held to maturity the return is about 12.4%, provided the issuer pays in full. Buy the same bond for Tk 1,04,000 and the yield would be below the coupon. Tax is left out and the numbers are only an example.
Common mistakes
- Treating the coupon as the return without looking at the price you pay.
- Buying at a premium for a high coupon and assuming the return is just as high.
- Looking only at current yield. It leaves out the gain or loss from getting face value back at maturity.
- Assuming a higher yield is simply better. Often a high yield means the market has more doubts about the issuer repaying.
The coupon tells you what a bond pays; the yield tells you what you actually earn at the price you paid. Compare using yield to maturity, and remember that when the price falls, the yield rises.